Central bankers face a more challenging economic landscape than they have experienced in decades and will find it harder to root out high inflation, top multilateral officials and monetary policymakers have warned.
The world’s leading economic authorities this weekend sounded the alarm about the forces working against the Federal Reserve, European Central Bank and other central banks as they combat the worst inflation in decades. Speaking at the annual gathering of central bankers in Jackson Hole, Wyoming, many said that the global economy was entering a new and tougher era.
“At least over the next five years, monetary policymaking is going to be much more challenging than it was in the two decades before the pandemic struck,” Gita Gopinath, the IMF’s deputy managing director, told the Financial Times.
“We are in an environment where supply shocks are going to be more volatile than we’ve been used to, and that’s going to generate more costly trade-offs for monetary policy,” she said.
The pace of price growth has rocketed as supply-chain disruptions from Covid-19 lockdowns collided with high consumer demand fuelled by unprecedented fiscal and monetary support since the start of the pandemic. Russia’s full-scale invasion of Ukraine delivered a series of commodity shocks that created yet more supply constraints and price increases.
These dynamics have forced central banks to aggressively tighten monetary policy to ensure inflation does not become more deeply embedded in the global economy. But given their limited capacity to address supply-related issues, many fear they will be forced to deliver much more economic pain than in the past in order to restore price stability.
David Malpass, president of the World Bank, warned that central banks’ tools, especially in advanced economies, are ill-suited to address the supply-related inflationary pressures that are driving a significant portion of the recent inflation surge.
“The rate hikes are having to compete with lots of friction within the economy, so I think that’s the biggest challenge that they face,” he said. “You’re hiking rates in the hope of reducing inflation, but it is being counteracted by so much friction within the supply chain and production cycle.”
Key figures at both the Fed and the ECB made “unconditional” pledges to restore price stability. Jay Powell, Fed chair, on Friday warned that as a result a “sustained period” of slow growth and a weakening of the labour market were likely.
Gopinath cautioned that the ECB faced particularly acute trade-offs; there was “a real risk” that a stagflationary environment of languishing growth and high inflation will emerge in Europe, given the intensity of the energy crisis caused by the Ukraine war, she said.
Malpass said that developing economies are also particularly vulnerable as global financial conditions tighten.
“Part of it is higher interest rates and they have a lot of debt outstanding, so that increases both their debt service costs but makes it harder for them to get new debt,” he said. “The added challenge is the advanced economies drawing heavily on global capital and energy resources, creating a lack of working capital for new investments [elsewhere].”
The enormity of the economic challenge confronting central bankers was summed up by Changyong Rhee, head of the Bank of Korea, when he said that whether the world would revert to a low-inflation environment was the “billion-dollar question”.
Cutting through the buoyant atmosphere among Jackson Hole attendees — who, because of the pandemic, had waited two years to socialise and trade ideas face-to-face — was the overarching concern that the world and the economic relationships that underpin it had fundamentally changed.
The sharp shift in economic dynamics left attendees doing some soul-searching. “There’s a lot of humility in the room [about] what we know and what we don’t know,” said Gopinath.
The event revealed in stark detail the faultlines caused by the pandemic and Russia’s invasion of Ukraine.
“We have the energy crisis, we have the food crisis, we have the supply chain crisis and we have the war, all of which has profound implications for the economic performance of the world, for the nature in which the world is interconnected and most importantly, for the relative prices of many, many things,” said Jacob Frenkel, the former governor of the Bank of Israel who chairs the board of the Group of 30, an independent consortium of ex-policymakers.
Complicating matters are doubts about just how much policy tightening is needed in the face of unpredictable gyrations in supply and, in turn, prices.
“Currently, we have to make our decisions against the backdrop of high uncertainty,” said Thomas Jordan, chair of the Swiss National Bank. “Interpreting the current data is challenging, and it is difficult to distinguish between temporary and sustained inflationary pressure.”
According to the ECB’s Schnabel, the next few years are at risk of being known as the “Great Volatility” — in contrast with the past two decades, which economists called the “Great Moderation” because of the relatively tranquil dynamics.
Many officials have come to believe that the structural forces that kept price pressures in check — chiefly globalisation and an abundant labour supply — have reversed.
“The global economy seems to be on the cusp of a historic change as many of the aggregate supply tailwinds that have kept a lid on inflation look set to turn into headwinds,” warned Agustín Carstens, general manager at the Bank for International Settlements. “If so, the recent pick-up in inflationary pressures may prove to be more persistent.”
Sceptics of this view say they are confident that the world’s leading central banks will be able to ward off entrenched high inflation.
“The issue central banks need to focus on isn’t establishing inflation credibility,” said Adam Posen, president of the Peterson Institute for International Economics. “The issue is redoing the strategy and the inflation targets for a world where you’re going to have more frequent and larger negative supply shocks.”
The 2 per cent inflation target that central banks in advanced economies have mostly abided by for decades came up repeatedly throughout the conference, with economists suggesting that it may need to be adapted to fit a more fractured global economy.
Long before the inflation surge, the Fed in 2020 announced it would target inflation at a 2 per cent average over time, in order to make up for past periods of undershooting the target. Last year the ECB said it would tolerate inflation temporarily rising above 2 per cent at times.
Many economists advocated for a 3 per cent inflation target. According to Stephanie Aaronson, a former Fed staffer now at the Brookings Institution, it would give central banks more flexibility to look beyond supply shocks and support the economy during downturns.
“If you’re coming down to 2 per cent and you can shorten the amount of low growth you need and also move to a better regime in the long-run, because you are less constrained by the zero lower bound, it seems to me like a win-win,” said Maurice Obstfeld, the former chief economist of the IMF, in an interview.
When and how a central bank like the Fed and other central banks approach changes in their mandates will be critical, given their tenuous control on inflation and the risk that households’ and businesses’ expectations of future price increases could become entrenched.
Karen Dynan, an economics professor at Harvard University who previously worked at the US central bank, said it would be “very risky” for the Fed and its counterparts to even broach the topic until they have reined in inflation.
“They need to do everything they can to preserve their credibility — and maybe in some cases, restore their credibility — but they are going to have to think hard about what that new goal should be.”
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
